And in today’s low-interest-rate environment, the cost of holding the property is the lowest it’s ever been.

My advice for budding investors is to understand that wealth from real estate is not derived from income because residential properties are not high-yielding investments.

Real wealth is achieved through long-term capital appreciation and the ability to refinance to buy further properties.

If you seek a short-term fix with cash flow-positive properties, you’ll struggle to grow a future cash machine from your property – it’s just that simple.

But here’s the trick…

You can’t turn a cash flow-positive property into a high-growth property, because of its geographical location.

But it’s all about knowing how to invest in property that can achieve both high returns (cash flow) and capital growth by renovating or developing your high-growth properties.

This will bring you higher rent and extra depreciation allowances, which convert high-growth, relatively low cash flow properties into high-growth, strong cash flow properties.

This means you can get the best of both worlds.

Put simply… Cash flow keeps you in the game while capital growth gets you out of the rat race.

READ MORE: Why Capital Growth Beats Cash Flow Every Time

Pros and cons of investment property

Compared to other forms, property investing is a safe and proven method for growing your wealth.

The pros

1. Strong historical performance

Residential property outperformed all other investment types, including shares over the past 20 years.

2. Control

Property is a great investment because you have direct control over the returns from it. One of the major benefits is that you can manage your assets rather than leaving the decisions to a large corporation or fund manager. What this means is, that you can improve your property or buy a property with a twist that will give you quick capital growth.  If your property is not producing good returns, you can add value through renovations or adding furniture to make it more desirable to tenants. In other words, you can directly influence your return by taking an interest in your property and understanding and meeting the needs of your prospective tenants.

3. Leverage

One of the special things about the property is that banks will lend you up to 80% of the value of the property, enabling you to use other people’s money to buy larger amounts of your investment.

4. Tax advantages

Investment properties offer large tax advantages including depreciation and the possibility of negative gearing if it is appropriate for you.

5. Security

It is often said that residential real estate offers the security of bricks and mortar.  What this means is that houses don’t “go broke” as companies or shares do. This is partly due to the size of the residential market and also the fact that just under 70% of the people that own properties are not investors, but are owner-occupiers.  The residential market is the only investment market that is not dominated by investors and this provides a built-in safety net.

6. Income

The rental income you receive from your property allows you to borrow and get the benefits of leverage by helping pay the interest on your mortgage.

7. Property is forgiving

Even if you bought the worst property at the worst possible time, chances are it will still go up in value over the next years. History has proved that real estate is possibly the most forgiving asset over time.  If you are prepared to hold an investment property over a number of years it is bound to rise in value.

8. You can insure for many of the risks

Not just building insurance, but smart investors take out landlords’ insurance to protect their interests.

The cons

Property investments are not all rainbows and lollipops, there are some cons associated with investing in real estate:

1. High entry costs

With property prices constantly on the rise it continually gets harder and harder to get into the market. These high entry costs keep a lot of investors out and make it hard to begin if you don’t have a savings discipline and a bit of money behind you.

2. Lack of diversification

Because of the high entry cost it is common for beginning investors to have all their eggs in one basket. This lack of diversification is a risk if the market changes suddenly or your investment doesn’t perform the way you expected. Of course, the answer to this is to own the right type of real estate, the type that doesn’t fluctuate in value significantly when the market turns. (I’ll explain this in more detail shortly.)

3. Ongoing and additional costs

Investment property carries with it ongoing costs like insurance costs, council rates, mortgage repayments, maintenance, renovations, etc. These expenses may be regular or may come as a surprise when you least expect them. And if you own a high-growth property, it is likely that in the early years the rental income will not be able to completely cover your expenses. While many investors top up this negative cash flow from their savings, savvy investors set up cash flow buffers in a line of credit or offset account to cover their negative gearing.

4. Tenant problems

Despite engaging the best property managers to look after your property, you can still have tenant problems or periods of rental vacancy, which unless you have the protection of landlord insurance or cash flow buffers can put a dent into your finances.

5. Property is illiquid and lumpy

It takes time to sell and you can’t simply sell off one part of the house and convert it to cash.

6. Surprises

These always seem to creep up on investors – things like changing interest rates or unexpected repairs.

READ MORE: The Pros and Cons of Property Investment

Which is the right property to buy?

There are several real estate investment types in the market that you can choose from as an investor.

One of the most popular is the freestanding house, which serves as a great home for tenants looking to raise a family.

A moderate-sized family home in the right suburb that is pet-friendly and with a fenced backyard often commands a high price in the rental market and delivers consistent capital growth because it is in strong demand by owner-occupiers.

However, our changing demographics mean more families are trading their backyard for a balcony, so if you want to target singles, couples, students, young professionals, and retirees, you could invest in a unit or apartment that best suits their busy lifestyles.

The location is of utmost importance in these properties, as tenants prefer a place that is close to their university or workplace and is easily accessible to public transport.

While some people invest in a holiday home, in my mind these make poor investments as they are in seasonal demand and may remain untenanted for long periods of time, and their values fluctuate considerably depending upon the general economic cycle.

You see…when times are tough no one really wants to (or can afford to) buy a holiday home.

There are also:

• Townhouses – an increasingly popular style of accommodation for a wide demographic
• Villas – these make great investments because they are “landed properties”
• Blocks of apartments – these are scarce, but sound investments for those with deep pockets
• Student accommodation and serviced apartments – make terrible investments
• Enough said
• Commercial and Industrial real estate – sound investments for sophisticated investors who already own a substantial residential property portfolio

Understanding the market for each type of investment property is the key to knowing how to invest effectively. It’s also worth seeking market updates from a real estate agent and investment advice from a buyer’s agent.

As an investor, it’s important to understand that location does most of the heavy lifting for your real estate investment success.

Around eighty percent of your property’s performance will be due to buying in the right location and the balance by owning the right property, an “investment grade” property that suits the fundamental demographic in that location.

That’s why I suggest following my advice of a strategic top-down approach to finding a property that will outperform the general market.

1. I start by looking at the macroeconomic environment – the big picture of how Australia’s economy is performing and in general, the outlook is good – especially in the eastern states.
2. Then I look for the right state in which to invest – one that will outperform the Australian market averages because of its economic growth and population growth. It is likely that both Sydney and Melbourne will strongly outperform the other states – they’re forecast to deliver around two-thirds of the new jobs over the next few years.
3. Then within that state, I only invest in the capital cities and not in regional areas – again because that’s where the bulk of the jobs will be created and where most people are going to want to live. I would look for the right suburb for your investment property – one that has a long history of outperforming the averages. It’s all about demographics, as these suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals will be prepared to, and can afford to, pay a premium to live because they have higher disposable incomes. In general, they’re the more affluent inner- and middle-ring suburbs of our big capital cities, so I check the census statistics to find suburbs where wage growth is above average.
4. Then I look for the right location within that suburb. Some liveable streets will always outperform others and in those streets, some properties will always be more desirable than others and outperform the investments by increasing in value.
5. Then within that location, I choose the right property, using my 6 Stranded Strategic Approach.
6. The finally… I would buy it at the right price. I’m not suggesting you look for a “cheap” property – there will always be cheap properties around in secondary locations. I’m suggesting you look for the right property at a good price.

So how do they know which is the right property to buy?

My property investment advice is to follow the 6 Stranded Strategic Approach:

1. I would buy a property that would appeal to owner-occupiers because owner-occupiers will buy similar properties pushing up local real estate values. This will be particularly important over the next few years when the percentage of investors in the market is likely to diminish.
2. I would buy a property below its intrinsic value – that’s why I would avoid investing in new and off-the-plan properties that come at a premium price.
3. I buy a property with a high land-to-asset ratio – but this does not necessarily mean a large plot of land. Well-located apartments have an attributable significant land component under them.
4. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. This will be an area where more owner-occupiers will want to live because of lifestyle choices and one where the locals will be prepared to and can afford to pay a premium price to live because they have higher disposable incomes.
5. I look for a property with a twist – something unique, special, different, or scarce about the property.
6. I buy a property where I can manufacture capital growth through renovations or redevelopment rather than relying on the market to do the heavy lifting.

By following my 6 Stranded Strategic Approach, I minimise my risks and maximise my upside.

Each strand represents a way of making money from property and combining all six is a powerful way of putting the odds in my favour.

If one strand lets me down, I have four or five others supporting my property’s performance.

When you look at it this way, property investment strategy takes a lot of time, effort, research, and something most investors never attain – perspective.

This is invaluable in knowing how to invest in real estate.

What I mean by this is that if you can gain a lot of knowledge over the Internet or by reading books or magazines but what you can’t gain is experience.

It takes many years to develop the perspective to understand what makes an investment-grade property.

That’s why I recommend employing a property strategist to guide them.

By the way… this is not a buyer’s agent, even though a buyer’s agent will be involved eventually to purchase the property.

In fact, in today’s challenging environment, it is more important than ever to have more than just a property strategist, but a team of advisors who take a holistic approach to your wealth.

By the way…that’s what we specialise in at Metropole.

We take a macro view of your needs and will build you a customised, personalised Strategic Property Plan, and then we will help you implement this strategy by coordinating the various consultants including a buyer’s agent.

READ MORE: Where should I buy my next investment property in Australia?

Understanding property market cycles

While timing the market is not the be-all and end-all, it certainly helps to understand how the property market moves in cycles.

Following the herd and buying when everyone else is on the property bandwagon doesn’t always work.

That’s often when the market is near its peak.

On the other hand, you have more chance of nabbing a good deal in a buyer’s market, when the property is out of favour.

That’s why Warren Buffet said, “Be fearful when others are greedy and be greedy when others are fearful.”

Having said that, over the years I’ve changed my view on timing the market, especially if you’re an established investor.

If you’re into real estate for the long haul (and that’s really the only way to play the property game) then time in the market (owning a property that will outperform the averages in the long term) will trump timing the market (making a one-off capital gain, but then often missing out on strong, long term growth because you’ve bought in the wrong location).

Note: Time in the market is what delivers the most capital growth.

As you can see from the graphic below, if your $500,000 investment property increases in value by 7% per annum, it will be worth almost $1.4 million in 15 years’ time, but almost half of this capital growth will occur in the last five years.

This means the sooner you start your real estate investment journey the better because you’ll have time and compounding working longer for you.

READ MORE: What makes property prices rise and fall

Houses vs. apartments

Over the last few years, houses have outperformed apartments so many are wondering are apartments still a good investment:

• Capital growth has been stronger for houses than apartments
• Rental growth has been stronger for houses than apartments

But these are big picture “overall” stats – some apartments, especially family-friendly low-rise apartments in lifestyle neighbourhoods have still performed well while high-rise CBD apartments have performed very poorly with significant vacancies (up to 30% in Melbourne), falling rents, and falling values with few buyers interested in these.

If you can afford a house in a good location, then that’s probably the way to go.

But if your budget doesn’t allow you to buy a house in the right location, I’d rather own a “family-friendly” apartment in a good suburb, than a house in the outer suburbs.

I’ve already explained that around 80% of your investment’s performance will be due to its location and about 20% due to owning the right property in that location.

For many investors, apartments offer an affordable entry point into the property market.

Financial advisor Stuart Wemyss conducted a performance review of investment-grade apartments.

He concluded:

• Following a period of relative underperformance compared to the freestanding housing market, current apartment prices do not reflect an inherent underlying value underpinned by recent land appreciation.
• There is a high likelihood of significant price growth in the coming ten years to rectify the current misalignment, making the right type of apartments (family-friendly medium and low-density apartments in lifestyle suburbs – not the CBD) an asset worth holding onto or considering investing in.
• Implied land values indicate that apartments are currently intrinsically undervalued. Houses have displayed strong capital growth rates over the past eight to 10 years due to appreciating land values. Logically, therefore, despite limited price growth recorded during the same period, apartments (which tend to have a 45-55% land value component) must also be worth more. In fact, intrinsic land values implied by house price growth during the previous seven years suggest that apartments may be fundamentally undervalued by 30-40%.

New vs. old investment properties

Just like the houses vs apartments debate, old and new properties each have their own benefits.

Let’s face it when it comes to buying big-ticket items we all love new, shiny things, but without a doubt, for the majority of investors, established properties will always offer far better capital growth potential than a new build for a whole number of reasons.

So let’s take a look at the benefits of old versus new.

1. A better deal

When you buy a new investment property, you’re not only paying for the property, but you’re also handing over a premium to the developer for their profits and marketing costs.

Essentially, you are handing your first few years’ worths of capital growth straight to the developer!

With established properties on the other hand, when you buy right you end up paying below intrinsic value cost.

2. Value-add potential

Obviously, when you buy a new property everything is already done for you and while this might seem appealing, it is actually a huge disadvantage.

The problem is you have sacrificed the potential to add value, or “manufacture” capital growth, that comes with an established house or apartment.

At Metropole, the ability to add value is one of the primary attributes we look for in an investment property.

3. Better than an educated guess

One of the most critical factors when it comes to investing advice in real estate is to know your market.

However, a new building doesn’t come with a track record of property price growth to help you make an informed decision when it comes to pricing.

And don’t pay too much attention to what other inexperienced investors have already paid to buy into the complex – most will have overpaid and lost out in the long term.

4. Stronger performer in a slower market

One of the big issues with new and in particular off-the-plan properties is that when the market slows, so too does your rate of growth.

New apartments and houses are often the first to see prices soften when the overall market loses momentum.

Often though, established homes will either maintain their value or experience a very minimal adjustment.

Note: Investing is really a game of finance so, when it comes to good property investment advice, a sound financial strategy is just as important as a sound investment property strategy.

Without a well-rounded understanding of how to maximise your borrowing power, use equity to buy your investment, build your portfolio and maintain a financial buffer to see you through the difficult times that we all ultimately face, you’re setting yourself up to fail financially.

This will often mean taking an interest-only loan for your properties, because rather than paying the principal back each month (lowering your debt); the extra cash flow could be used to service a bigger debt and support a larger property portfolio.

Common expenses real estate investors must pay

Topping the list of the most common property expenses for investors is loan repayments, the amount of which varies depending on the borrowed amount, loan type, loan term, and loan service fees.

As you continue to hold and maintain your investment property, you may also need to pay for land tax and council rates, which vary by government area.

For apartments and townhouses, there are also body corporate fees paid quarterly to assist in their upkeep.

Building and landlord insurance are a must in limiting the financial impact of unforeseen circumstances, like sudden damage costs and tenant-related liabilities.

Other fees to take into account include property management fees, advertising for new tenants, and repair and maintenance costs.

How much should you budget for repairs and maintenance?

One of the most difficult aspects of property management is anticipating the costs of maintenance and repairs.

They can occur at any time, plus the expenses vary greatly depending on the age of the building, the nature of the repair, and any insurance policies in place.

Furthermore, sometimes these costs are not tax-deductible.

Repairing an item – such as a cupboard door – is tax-deductible.

However, improving the same item – such as replacing all cupboard doors with a newer, more modern style – is considered a renovation, which is not immediately deductible.

To create a budget for repairs and maintenance, it’s a good idea to estimate how much it might take to replace the ‘big ticket’ items throughout the property, such as dishwashers, hot water systems, and carpets.

Determine their current age and life expectancy.

Based on those figures, calculate the remaining life expectancy of the item.

Rank all the items in order of increasing estimated remaining life expectancy, and plan accordingly for these anticipated expenses in the next five years.

Property investing and tax

One of the biggest reasons why investment property remains popular in Australia is the whole raft of tax benefits available.

Now my advice is that you shouldn’t invest solely for tax benefits, but they’re a nice little bonus that makes keeping your property easier.

Things like claiming legitimate business expenses of running your investment business as well as negative gearing, which allows investors to offset any shortfall between the rent that you collect from your property and the expenses that you pay for it against your other income.

However, if you sell a property at a profit you’ll need to pay capital gains, but even this has adjustments, as you can currently benefit from a 50% discount on capital gains for a property that you’ve held for longer than 12 months.

READ MORE: How does owning an investment property affect taxes?

Property management

Renting out your property allows you to earn an income from your investment, but you really need to employ a proficient property manager so that your investment property is well-maintained and continuously tenanted.

Your property manager is responsible for a number of things, such as advertising your property, receiving enquiries during the leasing process, and screening and selecting tenants. They also help to make sure that your property is maintained, with repairs and updates performed as needed.

Most importantly, as your property manager is responsible for collecting rent, they follow a clear process in accordance with the law.

Aside from the initial fees that you need to pay when buying an investment real estate, you also have ongoing costs like council and water rates, insurance, body corporate fees, land tax, property management fees, and maintenance and repair costs.

These expenses are usually tax-deductible.

When it comes to insurance, you must not only take out building insurance, but you should also consider landlord insurance because this will protect you if a tenant damages the property or leaves without paying rent.

Repair and maintenance costs should also be factored into your budget.

Should you manage your property yourself to save money?

Sure you can get rid yourself of property management costs if you choose to manage your investment property yourself, but in my mind, this is a sure way to disaster.

Property managers can set the right market rental rates and collect rent payments on time.

They can also advertise your property astutely to avoid long vacancies.

When it comes to tenants, property managers can screen them and manage all aspects of the landlord-tenant relationship.

They also often have connections with contractors, suppliers, and maintenance workers, if ever you need one.

Property managers are also knowledgeable about housing regulations and property laws, so you can be sure that your properties are always complying with them.

What are the risks and how can they be minimised?

1. Market risk

The property market moves in cycles and at times there are external factors that cause a market-wide slowdown or downturn.

Investors who focus on a long investment time horizon weather these storms as capital city markets eventually correct and recover.

However, at this stage of the property cycle, it is likely that the value of well-located capital city properties is likely to keep increasing with little general market risk for A-grade homes and investment-grade properties.

2. Liquidity risk

Liquidity is the ease with which you gain access to the money you have within an investment.

One disadvantage of real estate investments is the lack of liquidity compared to other types of investments. Your situation may change abruptly due to a change in life circumstances, but you may be stuck with your property for several months or years, depending on the local market cycle and your financial situation/requirements.

3. Interest rate risk

A rise in interest rates will affect variable-rate mortgages, meaning the cost of your debt can increase as interest rates climb, putting a strain on your cash flow.

However, the risk of interest rates rising over the next couple of years is very unlikely considering the firm “guarantees” given by Dr. Philip Lowe, governor of the RBA.

4. Buying the wrong property

Most properties are not “investment grade” and if you didn’t do enough due diligence and buy the wrong property in the wrong area at the wrong time, you could face years of slow or no growth or worse, no income due to a high vacancy in the area.

5. Cash flow crunch

If your tenant leaves you could face a cash flow squeeze for a short while and if you lose your job you may be unable to top up your rent to meet your mortgage repayments.

6. Currency risk

Foreign buyers who are investing in property in Australia are also subjecting themselves to currency risk, which is dependent on the movement of the Australian dollar.

7. Legislative risks

There are also sovereign or legislative risks in the property market, as any unfavourable government action can result in investment losses.

A good example of this is the possibility of changing negative gearing rules – which seems to come into discussion each year around budget time – a move that would substantially increase investor confidence.

As you can see, any investment property strategy involves some level of risk.

So knowing how to invest means knowing how to minimise these risks.

One way of minimising their risk is to have a financial buffer in place (with funds in an offset account) for your personal needs as well as for any unexpected investment expenses.

This will allow you to keep their properties well maintained and cope with any unexpected maintenance or vacancies.

All property investors should also consider taking out income protection and life insurance as well as landlord’s insurance to protect their interests.

Of course, the reason behind this recommendation is that one of the most important factors in an investor’s ability to keep growing their property portfolio is the ability to service their loans and use their income to supplement the rental shortfall in the early years.

Note: Without an income, you may not be able to hold on to your properties.

Similarly, if you die, you would need to consider how your spouse would be able to continue holding the investment properties.

So, I suggest you need to make sure they have insurance to sufficiently cover mortgage repayments if the worst should happen.

I’d also recommend that you seek advice from an accountant before purchasing an investment real estate to ensure you buy it in the most tax-effective manner.

Once you’ve bought your investment property you’ll need to arrange an investment property depreciation schedule to ensure you claim the most in deductions.

And no matter your age, it’s wise to consider estate planning because, while we never like to talk about it, it’s important to plan to look after your family after you’re gone.

This means you should see a solicitor and prepare a will, choose executors, and organise a power of attorney.

Finally, it’s important to treat your investments like a business and regularly review your portfolio with your property strategist to track its performance, ensure you have the right loans and best interest rates, and assess when you’re ready for your next acquisition.

Is it too late? Have I missed the boat?

The simple answer – NO, it’s not too late.

Of course, it would have been nice to buy a property 10, 15, or 20 years ago.

And yes it would have been great to buy a property in early 2020 when most people sat on the sidelines waiting to see what would happen in the market.

And sure our markets are correcting, but they’re not going to crash and it’s important to remember that there is not one “Australian property market” and even within each state, there are multiple markets, divided by geography, type of property, price point, etc.

Note: Property investment is a process – not an event.

That means to become a successful property investor you can’t just go out and buy any property. It should be part of a long-term Strategic Property Plan.

It should come as no surprise that getting a good team around you will be an important investment and not an expense and should allow you to build a property portfolio that will go a long way to replacing their income in the future.

At the same time, you must learn that property investing is not a get-rich-quick scheme and to achieve your future financial goals you will have to slowly build a substantial asset base and not chase short-term cash flow as many beginning investors do.

Here are a few other final tips so you’ll know exactly how to invest:

1. Formulate a plan: understand your end goals – what you want to achieve – and then make investment decisions accordingly.
2. Be cautious: You’ll find everyone is happy to give you advice. Rather than listening to well-meaning friends, it’s important to only listen to people who have achieved the financial independence you’re looking for and who’ve maintained it through a number of property cycles.
3. Understand the difference: between a salesperson and an advisor. Many salespeople are cloaked as advisors and while they suggest they’re representing you, in fact, they are representing the seller or a property developer. Only take advice from someone who is independent and unbiased rather than someone who is trying to sell you something.
4. Be prepared to pay for advice: I’ve found that good advice is never expensive. In fact, it’s much cheaper than learning from your property investment mistakes.
5. Not everything that glitters is gold: often when you start out it can be tempting to see opportunities everywhere. The problem is you don’t yet have the perspective to decide what is a good investment and what is not.

The property doesn’t discriminate; it doesn’t care who owns it.

The residential property market is worth well over seven trillion dollars today and over the next decade, it will increase in value by billions and billions of dollars.

If you get it right, you can have your share.

About Michael Yardney
Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He’s once again been voted Australia’s leading property investment adviser and one of Australia’s 50 most influential Thought Leaders. His opinions are regularly featured in the media.